Writing : Financial Analysis - Assignment Example

? FINANCIAL ANALYSIS al Affiliation) Company Microsoft (NASDAQ “MSFT is a Multinational technology company founded in 1975 by two students, Paul Allen and William Henry Bill Gates. Its mission is to enable people and businesses all over the world to be able to appreciate their full potential through the creation of technology that changes the way people communicate and work. The company is the leader in services, software, and solution that help individuals and companies realize their full potential. It has a strategic alliance with NIT Ltd, Dominion Enterprises, Inc, and Nokia. It develops supports and licenses software and products, and also deals with designing and selling computer hardware worldwide. The company’s windows line gives a personal computer operating system that mainly includes the windows & operating system. This primarily includes the Windows live suite of applications and Web services, the Windows of applications, and the PC hard products. The company has the server and tools division that provide window Server operating system, Visual studio, Windows Intume among other products. Other divisions include the online services division, and entertainment and devices division. The company generates its revenue through developing, supporting, and licensing a broad range of software products and services. This is where it designs and sells and also does advertising online to customers globally. The company also sells suits for products and services (Microsoft-Corporation, 2012). The core strength of this company is that its Microsoft software has a unique graphical user interface (GUI). This has increased the number of users because it gives computers new look and also enables users to operate computers easily. The company is currently producing a great deal of software that has enabled the company to maintain its market share and even expand its market. These software products also have names that have a brand like word, PowerPoint, excel, and access. These have been accepted by customers for many years promoting a competitive advantage. The company faces tough competition from various companies. Looking at the windows operating system, this division faces competition from various software products mainly Google and Apple. However, Windows has managed to compete effectively by providing customers their choice, an easy-to-use interface, value, security, flexibility, and compatibility with a wide range of hardware and software application. This is including those that enable higher productivity and large support network for any OS. Windows live software and services faces competition on similar products from Google, Apple, and Yahoo. The personal computer product faces competition from other hardware manufacturers. The Sever Division faces competition from companies like Hewlett-Packard, Oracle and IBM. However, the company competes by providing an enterprise-wide computing solution. Industrial Trend This company is in a highly competitive industry as seen above. This is mainly because there is constant change in the business model and technology. However, the company takes this as an opportunity; each shift in the industry is taken as an advantage of developing new technology, new products, and new ideas that will adjust with the trend of the industry and businesses. The company has invested a lot in research and development in order to meet the changing demands of the industry, the customer and the competitive forces. Company Vulnerability to financial threats The company faces a number of vulnerabilities that prove to be a threat financially for this company. The most crucial threat is high competition from large companies like Google, Apple and Yahoo. This is mainly due to constant developments in the technological world. However, the company has done its best in ensuring that they are also able to compete with these competitors. This is by having an active research and development department that ensures that the company is always at par with the change in technology and that its products always address the changing tastes of customers. This ensures that the products are always on demand and thus keeps the financial performance favorable. With this intense competition, the company also finds itself vulnerable to security threat. However, this is not always the case and rarely happens. In these modern days hackers always find new ways to attack some of the company’s services. Looking like a product like the internet explorer, there is the risk of an information disclosure vulnerability that can give a hacker access information in the Internet Explorer Zone and another domain. To mitigate this risk and ensure that they retain the confidence of its customers, the company has taken the initiative to inform customers of the risk. The company has also developed security updates that address this vulnerability. They modify the way the Internet Explorer handles objects contained in the memory (Kerner, 2013). Finally, the company is also vulnerable to foreign currency risk, credit risks, interest rates, commodity prices, and equity prices. Currency risk is especially in transactions, liabilities, and assets. However, the company has gone to a great deal to mitigate this risk. Mainly the company monitors this risk and uses hedges so as to be able to minimize or offset the risk. Hedging has ensured that the company maximizes the economic effectiveness of the foreign currencies. The main currencies hedged by the company are the Japanese Yen, the Canadian dollar, the euro, and the British pound. The company fixed-income portfolio is spread across maturities and credit sectors. This mainly consists of investment-grade securities. The average maturity of and the credit risk of the fixed income portfolio of investment-grade securities are managed so as the company can achieve economic returns that relates to certain fixed income indices. Looking at the equity portfolio, the company consists of global, emerging and developed market securities that face market price risk. The company has been able to manage this risk relative to certain domestic and global indices. Finally the company uses a variety of materials like precious materials and energy. All these are managed relatively with the global commodity indices with the expectation that these will correlate with the economic risk and return. As an investor, it is important to look at the opportunities that this company can take advantage of so as to increase the investor returns. Firstly, it is crucial to appreciate that with time, global telecommunication has become cheaper. With this, more and more people have now connected to the internet. This in turn has opened new markets that the company can tap into. It can also be seen that the demand of personal computers in not only America but also in global markets has remained strong. This is regardless of the fact that there is a growth in the popularity of handheld devices. This gives Microsoft the luxury of maintaining its market share. Finally, with the growth of applications in mobile devices and the personal digital assistants, there is a growth in the market. This is because it represents opportunities for the company to form strategic alliances in the market especially where the company has little or no presence. Financial Performance Profit Ratio To ensure that this is an appropriate investment, the profitability ratio looks at the overall performance of a company. Looking at the Income statement of the company, it is clear that the net income is favorable. Even though it has reduced from 2011 where it was $23,150 million to $ 16,978. This can be is because there is an extra expense of goodwill impairment. Due to the fact that the revenue is improving over the years, from 2010 to 2012 where the revenue is $62,484, $69,943 and $73,723 million respectively, it can be confidently ascertained that the performance will improve. Current and Quick ratio Looking at the current the rule of thumb is that the current ratio should be 2:1. This is where the proportion of the current assets to the current liabilities should not be too high or too low as compared to the rule of thumb (Palepu, 2007). Current ratio = Current Assets ? Current Liabilities 2011 = 74,918,000,000? 28,774,000,000 = 2.6: 1 2012 = 85,084,000,000? 32,688,000,000 = 2.6: 1 Quick ratio = (Current Assets - Inventory) ? Current Liabilities 2011 = (74,918,000,000 – 1,372,000,000) ? 28,774,000,000 = 2.56 2012 = (85,084,000,000 – 1,137,000,000) ? 32,688,000,000 = 2.57 From the calculations of the current ratio is within what is provided in the rule of thumb. This gives the company a good reputation in the market that attracts many investors. This is because it shows that the company is healthy where it has enough current assets to cover the current liabilities. It is less risky to invest in it because it is able to pay back its short term liabilities. The quick or acid test ratio is also favorable showing the ability of the company to pay debt and thus making the company less risky. The return of capital employed Return on Capital Employed= (Profit before interest and tax / Capital employed) 100% 2011 = (27,161,000,000 ? (108.704, 000,000 – 28,774,000,000)) * 100% = 40% 2012 = (27,763,000,000 ? (121,271,000,000 – 32,688,000,000)) * 100% = 32% The return of capital employed has reduced from 40% in 2011 to 32% in 2012. However, the company has a fixed income portfolio that is diversified across the credit sector and maturities. This is so as to ensure that the company is able to manage economic returns, which reflects to shareholder returns Stock Price Analysis It is necessary to determine the worth of the company shares before investing in the company. This is based on the fundamentals so as to ensure that the final decision is informed on which stock to buy. Basic earnings per share are based on the share price of common stock divided by the annual net income of the company. The components of basic and diluted EPS are as follows: Details 2012 ($) 2011 ($) 2011 ($) Net income 16,978,000,000 23,150,000,000 18,760,000,000 Cash dividends declared per common share 0.80 0.64 0.52 Common stock Issued 1,913,000,000 2,422,000,000 2,311,000,000 Common stock repurchased 5,029,000,000 11,555,000,000 11,269,000,000 Common stock cash dividends paid 6,385,000,000 5,180,000,000 4,578,000,000 P/E ratio 2010 = (2,311,000,000 ? 18,760,000,000) = 0.12 2011 = (2,422,000,000 ? 23,150,000,000) = 0.10 2012 = (1,913,000,000 ? 16,978,000,000) = 0.11 Research shows that the market price earnings ratio of 2010 to 2013 is 20.10, 12.15, and 9.367 respectively (YCHARTS, 2013). Since the P/E is lower than the P/E in the general market, the shares are not so expensive. It is crucial to note that investors are advised not to automatically go for a share because it is cheap. For this reason, it is necessary to look at returns from the investment. The dividend per share has increased from 2010 to 2012 from $0.52 to $0.64 to $0.80 respectively. This is also evident in the cash flow statement where the cash dividend paid is increasing over the years. This is evident where in 2010 dividend id $4,578 million, $5,180 million in 2011, and $6,385 million in 2012. With these figures, there is assurance of good returns from investing in the company. Conclusion In conclusion, the analysis shows that generally this company is good to invest in. There is security on the money invested because of the unique products and services that it provides. This uniqueness ensures that the products and services always have demand in the market and thus maintaining the company’s good performance. The company also has a competitive advantage in the market and generally performs well. The return on investment for shareholders in terms of dividend increases from one period to the next which is a confirmation of good returns for my investment. This company is also rated by analyst as being the best company to work with and one of the most admired companies, not only for its fortunes but also because of its performance. Bibliography Kerner, M. (2013, 02 12). eSecurity Planet: Microsoft Tackles 57 Vulnerabilities in February Patch Tuesday. Retrieved from ITBusinessEdge: http://www.esecurityplanet.com/browser-security/microsoft-tackles-57-vulnerabilities-in-february-patch-tuesday.html Microsoft. (2012). Financial Review. Retrieved from Microsoft Corporation: http://www.microsoft.com/investor/reports/ar12/financial-review/index.html Microsoft-Corporation. (2012). Annual Report for fiscal Year Ending June 30, 2012. Washington DC: The United States Securities and Exchange Commission. Palepu, K. (2007). Business analysis and valuation: IFRS edition, text and cases. London : Thomson Learning. YCHARTS. (2013, 06 03). Microsoft Corporation PE Ratio. Retrieved from YCHARTA: http://ycharts.com/companies/MSFT/pe_ratio Appendix Summery Statements (Microsoft, 2012) INCOME STATEMENTS (In millions, except per share amounts) Year Ended June 30, 2012 2011 2010 Revenue $ 73,723 $ 69,943 $ 62,484 Operating expenses: Cost of revenue 17,530 15,577 12,395 Research and development 9,811 9,043 8,714 Sales and marketing 13,857 13,940 13,214 General and administrative 4,569 4,222 4,063 Goodwill impairment 6,193 0 0 Total operating expenses 51,960 42,782 38,386 Operating income 21,763 27,161 24,098 Other income 504 910 915 Income before income taxes 22,267 28,071 25,013 Provision for income taxes 5,289 4,921 6,253 Net income $ 16,978 $ 23,150 $ 18,760 Earnings per share: Basic $ 2.02 $ 2.73 $ 2.13 Diluted $ 2.00 $ 2.69 $ 2.10 Weighted average shares outstanding: Basic 8,396 8,490 8,813 Diluted 8,506 8,593 8,927 Cash dividends declared per common share $ 0.80 $ 0.64 $ 0.52 BALANCE SHEETS 2012’ 000,000 2011 ’000,000 Total assets 121,271 108,704 Total liabilities 54,908 51,621 Total stockholders' equity 66,363 57,083 Total liabilities and stockholders' equity 121,271 108,704 CASH FLOWS STATEMENTS 2012 ‘000,000 2011 ’000,000 2010 ‘000,000 Net cash from operations 31,626 26,994 24,073 Net cash used in financing (9,408) (8,376) (13,291) Effect of exchange rates on cash and cash equivalents (104) 103 (39) Net change in cash and cash equivalents (2,672) 4,105 (571) Cash and cash equivalents at the beginning of the period 9,610 5,505 6,076 Cash and cash equivalents, end of period 6,938 9,610 5,505 STOCKHOLDERS' EQUITY STATEMENTS (In millions) Year Ended June 30, 2012 2011 2010 Common stock and paid-in capital Balance, beginning of the period $ 63,415 $ 62,856 $ 62,382 Common stock issued 1,924 2,422 2,311 Common stock repurchased (1,714) (3,738) (3,113) Stock-based compensation expense 2,244 2,166 1,891 Stock-based compensation income tax deficiencies (75) (292) (647) Other, net 3 1 32 Balance, end of period 65,797 63,415 62,856 Retained earnings (deficit) Balance, beginning of the period (6,332) (16,681) (22,824) Net income 16,978 23,150 18,760 Other comprehensive income: Net unrealized gains (losses) on derivatives 255 (627) 27 Net unrealized gains (losses) on investments (390) 1,054 265 Translation adjustments and other (306) 381 (206) Comprehensive income 16,537 23,958 18,846 Common stock cash dividends (6,721) (5,394) (4,547) Common stock repurchased (2,918) (8,215) (8,156) Balance, end of period 566 (6,332) (16,681) Total stockholders' equity $ 66,363 $ 57,083 $ 46,175 Read More